Letters of indemnity and the charterers’ obligation to provide security to release vessel from arrest

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The recent case of Trafigura Maritime Logistics v Clearlake Shipping is an illustration of the English Commercial Court’s ability to provide prompt action in urgent cases, even during the Covid-19 pandemic.

The judgment also provides guidance as to the interpretation of a standard form of letter of indemnity (LOI) issued when cargo is delivered without production of bills of lading.

Letter of indemnity (LOI)

The vessel “Miracle Hope” was time chartered by T and sub-chartered to C, who in turn sub-chartered to P for carriage of a cargo of crude oil. The voyage charters provided that charterers could instruct owners to discharge cargo without production of original bills of lading, subject to providing an indemnity in standard form. 

The standard LOI wording includes an undertaking that in the event of a misdelivery claim the party issuing the LOI will provide the owners with funds to defend the claim, and will provide “such bail or other security as may be required” to secure the release of the vessel if it is arrested.

In this case the LOI clause was activated in November 2019 when P required the cargo to be delivered without production of bills of lading. In March 2020 the vessel was arrested in Singapore by a bank which had paid for the cargo under a letter of credit and held the original bills of lading, but had not received the cargo. 

T called on C to provide security to release the vessel, and C passed this request on to P. Both of the charters were subject to English law and jurisdiction, and the English Court issued mandatory injunctions requiring C and P to provide security for the release of the vessel.

Remote video hearing due to COVID19

There were difficulties in agreeing with the bank on an acceptable form of security, and the vessel was still under arrest when the matter came back before the court in April 2020, at a hearing held remotely by video link.

T asked for the injunctions to be amended so as to require the charterers to provide a guarantee in whatever form would be acceptable to the bank, or to pay into court the full amount of the bank’s claim (about US$76 million). 

The judge had to consider the meaning of the phrase “such … security as may be required” in the LOI wording. He could not accept that this meant whatever terms were required by the arresting party, however unreasonable. In his view, it referred to the form of security required by the court of the place of arrest, which would ultimately have to decide whether to order the vessel’s release.

However, due to the Covid-19 pandemic, the Singapore court would be unable to consider the matter for several more weeks, and the judge therefore accepted that the English court had jurisdiction to resolve the issue.

The conclusion

After considering evidence of the sticking points in the negotiations in Singapore over the terms of the security, the judge declined to make a ruling as to which form of guarantee should be issued, since this should to be resolved (if necessary) by the Singapore court in due course. 

However, he did agree to order that the claim amount should be paid into court in Singapore to avoid further delay. Although both C and P said that it would be difficult for them to provide such a large sum within a short time, there was no cogent evidence that they were not capable of doing so.

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